First-time homebuyers jolt market into life

Much of the spurt in sales to first-time buyers is due to the Department of Housing and Urban Development (HUD) lifting the cap on its FHA-insured loans as part of the stimulus package passed under the Bush administration. On Jan. 1, the FHA raised the limit on the mortgages that it would insure to $729,750 in some high-cost parts of the country, such as the Bay Area.That is well above the previous cap of $362,790.

For many middle- and lower-income buyers, FHA is the only way to get a mortgage as it just requires a 3.5 percent down payment – compared with 20 percent for conventional loans – and qualifies borrowers with less-than-stellar credit.

“That’s about as good as it gets these days,” says Andrew LePageof DataQuick. The FHA, which now insures the vast majority of first-time buyers, covered 40,692 mortgages in February compared with 23,413 the year before.

“FHA loans are an important fuel for the sales activity we are seeing right now,” says Mr. LePage.

But with warnings that the bottom of the housing market is not yet in sight, and that hard times are still ahead, the increased FHA role carries some serious risk for the federal government. The Wall Street Journal reported last week that “home mortgages insured over the past two years by the Federal Housing Administration are falling into delinquency at a faster rate….”

“It’s risk that has to be managed,” says William Apgar, senior adviser to Shaun Donovan, the new HUD secretary of Housing and Urban development. The bigger risk, he says, would be to do nothing to fix the housing market.

States are also taking measures to nudge more real-estate newbies from the sidelines of the housing market and into a new home. Colorado will give first-time buyers up to $6,000 for a down payment and closing costs – money that would be repaid to the state once the buyer receives the $8,000 federal tax credit. New Mexico, Missouri, and Ohio reportedly have similar programs.

Riskier than it seems?

Some question whether now is really the right time to buy. Analysts expect it will be years before home values begin to appreciate again at rates of 4 to 5 percent annually. And unless prices climb within the next few years, some first-time buyers could find themselves “worse-off rather than better off” in the short-term, says Adam Koval, founder of SocketSite.com, a San Francisco real estate website.

Orler, the San Jose realtor, tells her buyers: If you can ride out this wave and stay put for five to seven years, prices will go up.

“I’m optimistic,” she says. “Things are going to turn and real estate is going to appreciate again."

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